restructuring - All posts tagged restructuring

Shares of component maker QLogic (QLGC) are down 88 cents, or almost 8%, at $10.50, after the company, which warned about slack revenue on July 9th, tonight delivered the formal results of the June quarter, and forecast this quarter’s revenue lower as well, saying that cloud computing is changing its traditional market so much that it is looking to restructure and cut expenses.

For the June fiscal Q1, revenue was $113 million, as expected from the pre-announcement, and EPS of 19 cents was 2 cents better than analysts were expecting.

During the call, the company’s CEO, Prasad Rampalli, talked at length about the continued weakness in the server and storage equipment markets, putting some of the blame on “an inventory build up primarily at a major OEM customer,” but also “weakness in our traditional enterprise server and storage markets,” weakness that, said Rampalli, “others in the industry have reported” as well.

Our forecasting assumptions related to enterprise server unit growth from the Grantley cycle turned out to be higher than the actual server shipment trend in the first quarter of calendar 2015. As you may recall, we had previously projected a 3% to 4% year-over-year server unit growth, primarily related to the Grantley cycle and the end-of-life for Windows 2003. However, the most recent Grantley data suggests that server units were flat to down in the enterprise and significantly up in the cloud environments. This trend is consistent with Intel’s first-quarter calendar-year 2015 earnings call, in which revenue from the data center group reflected weakness in enterprise but strength in cloud environments. Our actions are therefore, to recalibrate our focus on targeted segments of our OEM customers where you see growth opportunities. For example, a significant transition with network function virtualization in telco data centers, growth in channel OEMs and key cloud service providers all of whom we believe value our rich offload features that provide superior performance, lower total cost of ownership, and a first mover advantage in the 2550 100 gigabit ethernet environments. We are prioritizing our sales and engineering focus in these areas in an effort to build traction and momentum in FY16.

Rampalli said because of the weak demand for servers and storage, the company is going to cut expenses and re-evaluate its corporate structure:

We are targeting to reduce operating expenses to approximately $200 million for FY16. We’re also doing a deep dive on our cost structure, and we will prioritize our investments. We will work through these challenges and leverage our technologies and solutions to expand our addressable market opportunities. We believe the specific ethernet inventory challenges impacting the first half of FY16 will be largely behind us after our second quarter. As a Company, we believe our revenue in the second half of FY16 will grow from the first half of the year. We remain committed to our long-term strategy and will continue to focus on our core and expansion markets to deliver long-term growth and enhanced shareholder value.

Turning to the forecast, CFO Jean Hu projected revenue this quarter of $98 million to $106 million, well below the $123 million the Street has been forecasting.
Said Hu,

We expect a sequential decline in our revenue from advanced connectivity platforms at mid-point is the result of several factors. First, we expect revenue from fibre channel adapters to be approximately flat sequentially. Second, our target ASIC revenue is expected to decline sequentially, but we continue to expect year-over-year growth in FY16. Third, we expect our revenue from ethernet products to declined sequentially, and as mentioned earlier, will be impacted by approximately $3 million to $4 million as a result of the expected completion of the majority of the inventory buildup at one of our major OEM customers. In addition, we expect our revenue from ethernet products to be impacted by approximately $3 million during the second quarter at one of our top tier-one OEM customers, as we transition from [selling] ASICs to adapters. Once this transaction is completed, we expect to see a higher revenue stream from the new adapter products, which have a much higher average selling price in the second half of FY16 and beyond.

Shares of enterprise software vendor Citrix Systems (CTXS) are up $5.42, or almost 8%, at $75.05, after the company yesterday beat Q2 expectations, and forecast year revenue in line with consensus, and said it would undertake a broad review of its business, including naming activist shop Elliott Management to its board of directors and considering selling off a software unit.

It also said CEO Mark Templeton will retire, and that a search is underway for his replacement.

The response on the Street is quite positive to moves that analysts hope will bring “shareholder value.”

The stock got at least one upgrade, from Steven Ashley of R.W. Baird, who raised his rating on the stock to Outperform from Neutral, and raises his price target to $80 from $75, arguing that earnings can recover in 2018, perhaps hitting $5.85 per share from an expected $3.66 this year.

Writing with evident sarcasm that it was “just your run of the mill ho-hum quarter,” in which everything changed, he declares, “The fox is in the hen house,” he writes, and he likes the prospect for change:

Our upgrade reflects our belief that new board leadership will aggressively drive shareholder value in the years immediately ahead. If valuation lags, we are assuming additional measures will be taken. We recognize the flip side of Elliot taking a board seat in return for a one-year standstill agreement means a big-bang break-up/sale of the company in the near term is less likely.

The sale of Citrix’s “GoTo” business could bring in over $3 billion, he wagers:

With mid-70s gross margins and 10% CAGR we believe the business could be worth 4.5x revenue, or $3.2B, which net of tax might generate net proceeds of $2.2B. While BoD has not yet decided what to do with those proceeds, “if” the decision was made to buy back stock, that could reduce outstanding shares by 30-34M shares, or 18%-21% of outstanding, which would be nicely accretive to EPS.

Elsewhere, there’s some eager anticipation of earnings going higher on cost cuts, but also some caution from the bears about deterioration in the company’s mainstay virtualization products, where it competes with VMware (VMW).

Ed Maguire, CLSA: Reiterates an Outperform rating, and an $81 price target. Citrix’s 2Q results demonstrated progress in execution and operational leverage, as the company announced a strategic review of the SaaS business, and CEO transition plan as Elliot Management joined the board. EPS upside should boost sentiment that changes are afoot. Despite mixed fundamentals across different moving parts, focus is trained on shareholder return. Whether the SaaS business is sold or not, operational improvements are trending to deliver EPS leverage.”

Scott Zeller, Needham & Co.: Reiterates a Buy rating, and an $82 price target. “The SaaS business has officially been tapped for “strategic alternatives” in a not-surprising move by CTXS. With CEO Templeton announcing his retirement (search has begun), and Elliott getting 2 seats on the Board, we believe the march toward shedding products and cost control continues toward the 30% operating margin range targeted by Elliott. Our “cost savings scenario” is updated in our note, and suggests a CY17 EPS of $5.03. Our CY15 and CY16 revenue eases, and EPS is raised on cost controls [...] Although CEO Mark Templeton’s announced retirement is not a surprise, it comes sooner than we expected. Activist Elliott has reached a standstill for 1-yr with CTXS; Elliott has one board seat outright, and will have influence over a 2nd seat soon. We continue to believe Elliott’s targets of approximately 30% operating margins are achievable for CTXS.”

Michael Turits, Raymond James: Reiterates a Market Perform rating. ” We feel the cooperation agreement, operating committee, and GoTo review are positives as they could drive additional value s. Citrix also made multiple governance announcements that we feel could be a positive long-term for rationalizing the product portfolio and improving financial performance and shareholder value. While 2Q was a solid pickup from 1Q, long term we remain concerned about Citrix’s core desktop growth, EUC/mobile competition against VMware, and NetScaler slowing.”

Shares of software vendor Citrix Systems (CTXS) are up $2.58, or 3.7%, at $72.21, after the company this afternoon said its CEO, Mark Templeton, will step down, as the company brings activists Elliott Management on board, and re-affirmed its year outlook but missed with the current quarter view.

For Q2 ending in June, Citrix reported revenue rose almost 2%, year over year, to $797 million, yielding EPS, excluding some costs, of $1. That was better thanb the consensus estimates for $790.28 million and 82 cents.

CEO Templeton remarked, “We are starting to see the benefits of the restructuring actions we took at the start of 2015 in terms of margin expansion.”

Templeton will stay on for as long as it takes the company to complete a CEO search, he said.

Citrix said it added Jesse Cohn, a director at Elliott, to its board, and to two committees, the CEO search committee, and the Operations committee.

Elliott has been involved in a number of actions regarding tech companies, including Juniper Networks (JNPR), which has seen its results lately turn around; EMC (EMC), and Riverbed Technology, which in December accepted a buyout offer from private equity shop Thoma Bravo.

Citrix said its board of directors has formed an “operations committee,” which will be lead by board member Robert Calderoni, and which will conduct a “comprehensive review of its operations and capital structure, building upon the company’s previously announced initiatives to drive operating margin expansion through simplification, efficiency and portfolio refinements.”

The findings of the committee will be announced once the initial review is completed, said the company.

Citrix is also exploring the sale of one of its product lines, “GoTo.” Said Citrix, “The strategic alternatives review for this business could result in, among other things, a possible sale or spin-off transaction.” This follows on a previously announced effort to try and sell Citrix’s “ByteMobile” business, about which it said, “Citrix is currently in active discussions with third parties regarding a potential sale.”

For the current quarter, the company sees revenue in a range of $780 million to $790 million, below the average estimate for $791 million.

For the full year, the company affirmed a prior forecast of $3.22 billion to $3.25 billion, which is in line with consensus for $3.23 billion.

Said Templeton, president and chief executive officer for Citrix. “Through the additional actions we are announcing today, we’re taking steps to ensure that we are focusing all of our energy on our core secure app delivery offerings and setting the company up for even better execution, greater efficiency and profitable growth.”

Shares of data management technology maker Commvault Systems (CVLT) are down $5.60, or 14%, at $34.01, in early trading, after the company this morning reported fiscal Q1 revenue and earnings that missed by a wide margin, forecast this quarter’s sales lower than expected as well, and said the year outlook will disappoint as well.

Revneue in the three months ended in June declined 9%, year over year, to $139 million, yielding EPS of 12 cents, excluding some costs.

Analysts had been modeling $147.6 million 24 cents a share.

Revenue would have been down just 2% if not for the effect of the risingU.S. dollar.

For the current quarter, the company sees revenue being flat with last quarter, which is well below consensus for $154.4 million. For the full year, results are likely to be flat with last year’s $607.5 million, which is below the current $639 million estimate.

CEO N. Robert Hammer said the quarter had “proved to be more challenging than we expected” but that CommVault made “excellent progress on our business transformation plan.”

Added Hammer on the company’s conference call with analysts a short while ago,

As I said last quarter, it will take us into the second half of FY16 for the key elements of repositioning to have a positive impact on our financial performance. The likelihood that we will see good sequential quarter on quarter growth increases beginning in the December has now increased. Good year on year comparisons most likely not occur until the March 2016 quarter.

Hammer added staffing up in sales will increase overall sales productivity, especially in areas of the world where the company has a “hole” in selling to fill.

On the plus side, Hammer said the company’s partnership with Microsoft (MSFT) was expanding, with the software giant bringing CommVault into Microsoft’s Azure cloud computing service to help index data used in Azure, to create a “federated” index of data. He predicted the CommVault technology will enable a “massive cost savings” for Microsoft.

Hammer was pressed by analysts on the call why he would not do share buybacks if he believes in the company’s turnaround. Hammer replied that it was the company’s decision to “keep our powder dry” for further benefit to shareholders down the road.

Said CFO Brian Carolan, “Our prior stated objective of returning our software license revenue growth to historical levels in the second half of FY16 is no longer realistic.”

“However, we still believe we can demonstrate sequential growth for Q3 and Q4.”

Shares of Qualcomm (QCOM) are up 59 cents, or 1%, at $62.23, as the Street contemplates what to do with the stock as it undergoes its “strategic realignment,” announced last week.

That move will involve thousands of job cuts, and the company is also considering breaking apart into two pieces, a chipset company, which designs and sells semiconductors, and a patent holder that collects royalties for its innovations.

James Faucet with Morgan Stanley today raised his rating on the shares to Overweight from Equal Weight, with a $75 price target, writing that the market is “too pessimistic” on the stock, and that he anticipates “sources of upside for QCOM from new product releases, improving industry structure/conditions, and cost cutting/capital return moves.”

Faucet sees a path to $6.54 per share in earnings from this year’s projected $4.63, via multiple drivers. One is improving the chipset margin from around 13.6% now to 17% to 19%, which will contribute 46 cents a share. Regaining share at Samsung Electronics (005930KS) should add 36 cents a share in profit. An increase in 3G and 4G usage in China will contribute 45 cents a share in profit, and decreased share count, via reduced share-based comp, could add 39 cents to earnings. he writes.

However, Moore thinks one of the main things helping Qualcomm would be slowing chip process advancement at Intel (INTC):

For our part, we have previously been wary of the cost cutting magnitude announced by Qualcomm given the highly competitive market. To wit, there has never been a company in the mobile handset or baseband market that has gone through massive cost reduction programs that has been able to sustain competitive positioning — in every case, those cost reductions were a precursor to lost market presence, and often being pushed fully out of the market. In Qualcomm’s case, the circumstances may be slightly different for the time being (e.g., market share leader, royalty stream, etc.), but we are most assuaged by recent movements by Intel (INTC.O, covered by Joe Moore) to reduce its capital investment and slow the pace of advance of Moore’s Law. We believe that the push by Qualcomm to close the geometry gap with Intel has been a key driver of the annualized COGS + R&D increase of ~$7B over the last 4 years.

Faucet also thinks breaking up the company would be a bad idea:

Following activist recommendations, Qualcomm announced that the board and management are launching a strategic review of the company’s corporate structure. One of the outcomes activists have encouraged is a separation of the QCT and QTL businesses. We would not expect this outcome and believe it could be value destructive. We believe that past separations that have created value for shareholders have been businesses that are less intertwined. We think chipset sales from the QCT segment create an easier path to collecting royalties in QTL. If the businesses are separated — and we have no knowledge of the company’s intentions — so too does this enforcement mechanism.

There’s some debate on the matter of whether the company will break apart its patent licensing business, “QTL,” and its chip business, “QCT.”

The company is undertaking a review of its corporate structure, but has not committed to anything.

Last night, Qualcomm president Derek Aberle told me, “We’re going to take a fresh look at the corporate structure,” adding “I think it’s important to understand we’ve looked a this a couple times in past, but we are taking a fresh look at the matter under the current circumstances.”

Most the Street seems to think Qualcomm will not go so far as splitting its business: As FBR & Co.’s Christopher Rolland put it, “Management also bought some time with Jana Partners as it began a discovery process into a potential segment split, although we think it will ultimately reject the notion more easily with ‘independent’ backing.”

And Stacy Rasgon of Bernstein Research goes so far as to say “a split of the company, in isolation, does nothing (and indeed, would likely destroy value).”

But there are some who are much more inclined to think a split may very well happen.

RBC Capital Markets’s Mark Sue, who has an Outperform rating on the stock, and a $77 price target, actually thinks the split is the next step, writing “Cutting costs and splitting the business can be a start and we see these necessary steps as a precursor to larger strategic changes.”

Sue thinks the company would be better off as two separate entities:

Some investors may point to the synergistic benefits for a consolidated entity (i.e. negotiating contracts, better R&D leverage). We counter and see Qualcomm as two separate entities with cross- licensing agreements, more agile and more flexible: QTL, the licensing company with strong cash-generation and shareholder returns, and QCT, the chipset company that diversifies its smartphone business focus to adjacent markets and invests in innovation and growth.

Breaking up would let the chip business diversify:

What’s important for QCT is what follows the maturation in the smartphone market, increasing competition/mix shift at the low-end (MediaTek), trends towards vertical integration at key smartphone vendors (Samsung, Apple) and declining profitability in the core smartphone market. Qualcomm sees opportunities for growth in smartphones, however, we believe QCT needs to pursue opportunities in new markets to diversify its revenue stream. A deeper, focused push into data-center networking, data-center compute, Internet of things and connected cars are some adjacent markets to focus on. Beyond the CSR deal, QCT needs to acquire assets for scale (e.g. CAVM, SWKS, CRUS, etc.) as well as acquire semi companies with a broader revenue base (e.g. NXPI, TXN, NVDA, ADI) or even potentially make a counter offer for BRCM which may help Qualcomm limit its reliance on the smartphones/handset market.

And Sue makes the case the stock is cheap in the context of a break-up:

Our sum of the parts of the combined business points to an undervalued stock. Qualcomm’s taking down costs by 15% vs. FY14, dialing back from some of the science projects and committing to return >75% FCF to shareholders in addition to the $10B in share buybacks by March 2016. The balance sheet has meaningful flexibility to fund acquisitions (beyond the CSR deal).

Adnaan Ahmad of Berenberg Bank thinks the real value in the company is in the licensing side, not the chipset side, and he imagines a split in which the chip unit would have to then make acquisitions, perhaps buying an RF chip maker such as Skyworks Solutions (SWKS):

We have, through many missives over the years, stated that there is a potential for QCOM to split. In our Monologue with Paul Jacobs, we said the business should split and that QCOM could sell its QCT division to Intel (or now even China Inc, given its global aspirations). The remaining QTL business could then acquire ARM and other intellectual property (IPR) and licence assets. This is a strategic direction the board and management could take. Yes, there are synergies between QCT R&D and IPR discovery, but these could potentially be overcome. Or it could beef up its chip business by diversifying beyond wireless. The issue is what to buy. Broadcom has gone. Marvel? Cavium? QCOM’s management team does not have much experience outside wireless, so would it even be able to diversify without a management shake-up? We are not too sure. That leaves expanding further into wireless: Qorvo and Skyworks Solutions, for example, are names that come to mind.

Shares of Qualcomm (QCOM) are down $1.54, or 2.4%, at $62.65, extending last night’s losses, after the company slightly missed fiscal Q3 revenue expectations and cut its year outlook, and said it would undertake a “re-alignment” of its business that will cut $1.4 billion from its annual costs and reduce its workforce by 15%.

Following the report, the company’s management — CEO Steve Mollenkopf, CFO George Davis, and president Derek Aberle, held a conference call with analysts covering various aspects of the plan and of the breakdown in the business.

In broad strokes, having lost a deal to supply Samsung Electronics (005930KS) in its flagship new smartphone, the Galaxy S6, said Qualcomm, its seeing lower revenue from supplying everyone else, as Samsung and Apple (AAPL) are squeezing everyone out of the most-expensive, most valuable portion of the smartphone market with their duopoly. That’s produced an inventory overhang that’s just now being burned off.

I spoke with Aberle following the conference call. The highlight for me is that the plan does nothing to address one of the main problems that brought Qualcomm to this pass: They had the wrong chip.

The “Snapdragon 810,” the part that got passed up by Samsung, had some issues, admitted Aberle, among them being the lack of a custom CPU “core,” which prior chips have had. Here’s Aberle addressing the matter:

We think there’s opportunity for improvement. We feel good about the [Snapdragon] 820 chipset towards the end of the year. In that particular account [Samsung] they’ve had an internal solution for many years and we’ve competed for a long time. We shared the volumes in that account, some higher, some lower. The 810 is a very solid part. We’ve done some things differently in that than we did historically, for example, we didn’t go to the leading [semiconductor process] node, and we didn’t use our custom CPU [Krait]. With the 820, we’ll be on the same leading-edge node as the internal solution, and the one that’s driving a lot of other advanced solutions. We do believe we are in a good position to compete strongly.

Nothing about last night’s plan addresses how the company could have stumbled so badly in coming up with the wrong part and losing Samsung’s business, to my mind.

Analysts today are cutting some price targets here and there. The bulls are cheering “value creation” in the plan. Bears are astonished at the collapse of the business.

Sanjiv R. Wadhwani, Stifel Nicolaus: Reiterates a Buy rating, and cuts his price target to $78 from $70. ” Most of the downside is largely reflected in the stock. We believe that the restructuring and strategic realignment should unlock value in the stock.”

David Wong, Wells Fargo: Reiterates an Outperform rating, and cuts his “valuation range” to $70 to $80 from a prior range of $74 to $84. “Qualcomm’s September quarter outlook was far below consensus and our own estimates, in part driven by the company’s continuing struggles with its chip business. The company announced a ”Strategic Realignment Plan” which involves, amongst other things, substantial costs cuts. We think that this is the appropriate action to be taking. Our FY15 GAAP EPS estimate decreases to $3.10 from $3.48 previously and our FY16 GAAP EPS estimate decreases to $3.70 from $4.44 previously. We are lowering our valuation range to $70-$80 from $74-$84, based on approximately 19-22x our FY16 EPS estimate of $3.70.”

Stacy Rasgon, Bernstein Research: Reiterates a Market Perform rating and a $68 price target. “Last night Qualcomm offered guidance for Q4 that practically knocked us out of our chair as the chipset business, which has been showing significant cracks in recent quarters, entered the realm of total collapse, with MSM unit outlook missing expectations by ~50M units [...] So now what? While we have not been hugely positive on the company’s prospects (seeing many of their issues as structural) even we are somewhat astonished at the rapid pace of deterioration in Qualcomm’s business, and it is likely that without JANA’s efforts, the stock would be getting absolutely crushed tomorrow. But while we expect some weakness given the degree of fundamental deterioration, at this point the hope of value creation on the back of JANA’s efforts is likely to offer some support to the stock, and many investors will likely be engaged in a furious round of sum-of- the-parts exercises in forthcoming days and weeks. However, while we could argue for further value creation from such efforts, we still remain unconvinced that fundamentals have found a bottom. Hence it’s unclear what the true “base” for any value creation ought to be.”

Christopher Rolland, FBR & Co.: Reiterates a Market Perform rating, and cuts his price target to $68 from $70. “Stepping back, we think QCOM remains the gold standard in today’s cellular technology. However, as the mobile innovation treadmill slows, we acknowledge a growing trend among handset OEMs to “roll their own” apps processors and baseband modems with the goal of reducing handset cost. Additionally, QCOM’s IP position in 4G LTE is weaker than 3G, as we expect modestly growing QTL pressure over the long run (LTE-only networks are not likely to proliferate until the end of the decade) [...] Management also bought some time with Jana Partners as it began a discovery process into a potential segment split, although we think it will ultimately reject the notion more easily with “independent” backing.

Tavis McCourt, Raymond James: Reiterates a Market Perform rating. “Although investors will clearly focus on the potential to split the businesses, any strategic review also likely brings with it the potential for M&A from either a buy or sell side perspective, although we believe the most likely outcome is simply more aggressive buybacks. We view QCOM as relatively inexpensive on a near-term P/E basis, but we feel it is just as likely to remain that way given the substantial fundamental headwinds the company faces. The shares trade at 13x our new CY16 EPS estimates, a 2x discount to its peer group of large cap tech peers, but we expect this discount to remain in the near term given the weakening fundamentals.

Shares of telecom equipment provider Ericsson (ERIC) are up 50 cents, or almost 5%, at $11.05, in early trading, after the company this morning reportedQ2 revenue and earnings per share that topped analysts’ expectations, with help from a rising U.S. dollar, which translated into higher sales in Swedish currency.

Revenue in the three months ended in June rose 11%, year over year, to 60.7 billion Swedish Krona, yielding EPS of kr1.45 per share, excluding some items.

Analsyts had been modeling kr58.9 billion and kr1.07 per share, according to FactSet.

Ericsson said that without the rising U.S. dollar, revenue would have been down 6%.

Ericsson CEO Hans Vestberg commented that Ericsson’s business benefitted from a “stabilization” of the equipment business in North America:

The mobile broadband business in North America stabi- lized in the quarter, but remained at a lower level than a year ago. The YoY decline in North America was partly off- set by an increased pace of 4G deployments in Mainland China. Sales growth was strong in the Middle East, India and South East Asia, while it continued to be weak in Japan. Professional Services sales increased YoY with continued strong global demand and growth in all ten regions.

Vestberg also said Ericsson’s cost-cutting proceeds:

The global cost and efficiency program is progressing according to plan. The target, to achieve savings of approximately SEK 9 b. during 2017 relative to 2014, remains. During the quarter, numerous activities were implemented globally including a reduction of 2,100 posi- tions in Sweden, resulting in higher than normal restruc- turing charges. Savings related to the activities will start to impact results towards the end of this year.

Even though gross profit excluding restructuring charges declined to 35.1% of sales from 36.6% a year earlier, operating profit margin rose to 10.4% from 7.7% a year earlier.

Bernstein Research’s Pierre Ferragu, who has an Outperform rating on the shares, this morning writes that there’s more profit improvement to come with expected layoffs in Sweden:

A lot of drivers should improve Ericsson’s reported numbers in the coming quarters: a recovery in US spending (equipment spending 45% below peak quarter is unlikely to be a sustainable level for many quarters), impacting topline and gross margin positively, the ongoing cost cutting programme and the settlement with Apple […] Management reiterated their cost cutting objective. As expected no impact is visible yet, but a 2,100 staff reduction in Sweden should materially impact the fourth quarter, further improving operating income.

Shares of Microsoft (MSFT) are up 22 cents, half a percent, at $44.52, in a broadly weak market, after the company this morning said it would take a $7.6 billion non-cash charge, and lay off 7,800, to restructure the phone hardware business it picked up from Nokia (NOK) last year.

Citigroup’s Walter Pritchard, who has a Sell rating on Microsoft stock, writes that the cut raises the question whether Microsoft will exit the phone business entirely.

The message is also that MSFT’s move here is more of a temporary retrenchment from phone as the company re-groups to innovate in way that might enable more success in the future in the mobile category. This is along the lines of the “focus” message that has been coming out of CEO Nadella over the last 12-18 months. We expect investor debate to ensue around whether MSFT is effectively exiting the phone business. Nadella’s memo nears an unclear message, noting “I am committed to our first party devices including phones” but then noting they are “moving from a strategy to grow a standalone phone business”. It is likely these are mutually exclusive, as having a phone business likely requires growth in market share from current ~3%. Short-term, we expect investors to be focused on the impact this announcement has on costs.

One effect is to hurt Microsoft with mobile developers, he thinks:

Medium / long term, MSFT is in a battle for developer / end-user relevance. Developers are increasingly building client-side (“mobile-first”) and server-side software (“cloud-first”). Client development is focused around iOS / Android and server development is focused around open source technologies running on cloud. Without setting the direction in either market and having proprietary control points, MSFT’s ability to monetize the next-generation of applications is in question. On the end-user front, while the PC isn’t likely going away, its utility to consumers has been diminishing as other form- factors and platforms (iOS, Android, Chrome) rise. Given the pace of innovation in the device market, this could eventually spawn a viable alternative to the traditional PC and MSFT’s productivity apps in the corporate market. We acknowledge these trends will take time to play out but we believe could impact the multiple investors are willing to pay for the stock.

Shares of Microsoft (MSFT) are up 9 cents at $44.39, after the latest bit of housecleaning by CEO Satya Nadella,the announcement this morning that the company will take a $7.6 billion non-cash charge to write down the goodwill of the company’s “Nokia Devices and Services” business that the company bought off of Nokia (NOK) for $9.4 billion last year.

Microsoft said it determined “the future prospects for the Phone Hardware segment are below original expectations.”

Almost the entire value of that purchase had been allocated to goodwill and intangibles on Microsoft’s balance sheet.

Microsoft plans to cut 7,800 jobs as a consequence of the write-down.

Microsoft’s Nokia unit had 7.6% of total global mobile phone shipments in the first quarter of this year, according to Strategy Analytics, but failed to crack the top five of smartphone vendors.

The company referred to it as being in keeping with “recent moves by Microsoft to better align with company priorities,” while CEO Satya Nadella stated that “We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family.

Added Nadella, “In the near-term, we’ll run a more effective and focused phone portfolio while retaining capability for long-term reinvention in mobility.”

That statement, vague as it is, really makes one wonder about a number of things, such as how Microsoft will spread Windows Phone to other vendors’ phones, given they’ve shown little inclination to build Windows phones.

Update:Daniel Ives with FBR & Co. is one of the first on the Street to comment. He has an Outperform rating on the stock, and he views this move as a positive one, letting Nadella slim down the organization by cleaning up the “mess” left by former CEO Steve Ballmer:

While the cuts will be painful for employees, they were necessary, in our view, and speak to Nadella’s attempt at cleaning up part of the mess that Ballmer left behind in Redmond, as the Nokia acquisition was a head-scratcher to begin with, in our opinion. Overall, we believe Nadella’s proactive approach at cleaning up the Nokia acquisition is a positive “tipping of the hand” around Microsoft’s future focus on software (versus hardware) as the company heads into a pivotal year, with Windows 10 front and center as a major product catalyst. Balancing growth and profitability. Specifically, we believe Nadella is shaking up the organization to make sure he has the right people in the right places to deliver healthy top-line growth for the coming years, as Microsoft needs to be a “leaner and meaner” technology giant in order to strike the right balance of growth and profitability around its cloud endeavors and the all-important launch of Windows 10 (July 29). Overall, we expect more detail around these initiatives on Microsoft’s earnings call (July 21 after the market close).

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Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.